Agenda item

[To receive a presentation on WV Living Governance and Linked Companies]. 

The Chief Operating Officer gave a presentation on WV Living Governance and Linked companies. The Chief Operating Officer stated the importance of transparency by Local Authorities about the Local Authority bodies that they control.

The Chief Operating Officer had taken an overall report to the Resources and Equalities Scrutiny Panel setting out the approach for all the controlled companies and committed for each of those bodies to bring a report to the relevant Scrutiny Panel. The Residents Housing and Communities Scrutiny Panel clearly had WV Living within its remit.

The Chief Operating Officer went through the background, under the Local Government Act 2003 (LGA 2003) and Localism Act 2011 (LA 2011), Local Authorities could own and control certain types of companies and other bodies such as Limited Liability Partnerships. As of 2018 Grant Thornton estimated that there were over 740 Local Authority owned companies with the largest proportion related to property and investment.

The types of bodies that there were, included; trading companies, certain joint ventures with other organisations, property companies, service provision companies including so called “Teckal” companies, whereby some Local Authorities ran services through companies they owned. A Legal framework provided that Local Authorities could trade using the power in the acts mentioned above.  More innovative methods to reduce costs were introduced due to the decline in popularity of outsourcing to the private sector and increased funding pressures on Local Authorities. The types of companies Local Authorities could have were those wholly owned companies by a single Local Authority, wholly owned by a collection of authorities, joint venture companies - such as Birmingham Airport and Limited Liability Partnerships, provided they were not used to trade commercially.

The Chief Operating Officer commented that in relation to WV Living as a trading company there were several measures put in place by LGA 2003.  It was about making sure there was a level playing field between Local Authorities and private sector companies.  Local Authorities received no direct advantage over the private sector, required greater transparency arising from the company law requirements, avoiding subsidy control restrictions, and had to make sure there was a lot of control over the way that trading took place.

The additional hurdles for trading companies were:-

-           that approval was obtained from full Council for the establishment of the company;

-           that the Local Authority prepared a business case supporting the exercise of the trading power;

-           a prohibition on subsidising trading activities; and

-           they could only trade in services other than those in which they had a statutory duty to provide to residents.

Critically for each of those linked bodies (trading companies etc.) best practice stated there should be:

-           a Shareholder Agreement between the Council and the linked body defining the arrangement;

-           a business case;

-           a business plan which was regularly refreshed setting out the Key Performance Indicators and expected financial performance; and

-           governance arrangements to monitor the compliance with the Shareholder Agreement/business case/business plan.

The Chief Operating Officer remarked that if the Local Authority had set up a limited company, you would expect that linked body to have a certain amount of autonomy to act.  The Council as shareholders did have some critical powers, including the power to appoint/remove directors, approve/reject business plans and importantly the power to wind up the linked company.  Whilst most of the Local Authority Linked Bodies had worked well, assisting in the delivery of key services, there has been issues with some such bodies including those in Nottingham City Council and London Borough of Croydon. Local Authority companies had led certain Local Authorities to face significant financial risks. It was critical the Council learnt lessons from other authorities and that was part of the Council’s culture.  

The Chief Operating Officer stated that Lessons from Nottingham City Council were laid out in a report in August 2020 from auditors Grant Thornton regarding Robin Hood Energy “RHE” which was a trading company set up by Nottingham to provide energy to its residents.  However it was not successful and led to a substantial financial loss to the Local Authority.  The business failed and led to a bill to the tax payer which resulted in a report for the public interest.  The auditors noticed that there was very much a mudding of the water between Robin Hood Energy the company and the Council itself. The company which was a separate legal body had Councillors on its board, there was confusion and a lack of control. The two sets of interests were merging, when it came to winding the company up there was a delay, which led to a further decline in finances. 

The Chief Operating Officer stated that there was also a report produced relating to the London Borough of Croydon and its company Brick by Brick. This led to the Council issuing a s114 notice.   This was when the Director of Finance considered that the finances of the Local Authority were in such a perilous state that anything other than urgent expenditure cannot be incurred. Brick by Brick was said to have been managed extremely poorly, there should have been better oversight of Brick by Brick, improved monitoring, and communication. Over 200 million pounds was invested into Brick by Brick with the local authority seeing no dividends or return.

The Chief Operating Officer assured Members that in Wolverhampton for all Linked Bodies there was greater oversight.  This included the Council’s Annual Governance Statement taken to Audit and Risk Committee each year and monitored on a 6 month basis. The Monitoring Officer had a duty to report to the Council that they had confidence that the relevant rules were being complied with and there was good oversight with each of the linked bodies.

The Chief Operating Officer stated that he believed that, as the Monitoring Officer, he did have good oversight.  Every month to two months an update was provided on those bodies either owned by the Council or potentially large liabilities to the Council (such as Wolverhampton College) to Cabinet Members/Leader of the Opposition.  At these meetings they went through the Budget, compliance with the business plan, the Key Performance Indicators and future planning.  In addition, the Council also had regular discussions with external auditors about the linked bodies. Auditors noted that regular check and challenge would lead to greater insight relating to Local Authority controlled companies across the board. The Chief Operating Officer stressed the importance of regularly bringing the details of each of the relevant Linked Local Authority Bodies to the relevant Scrutiny Panel. The Chief Operating Officer stated that they made sure they had a detailed review of the arrangements of every single one of the Linked Bodies at least every three years.

The Chief Operating Officer stated that WV Living was a City of Wolverhampton Council owned Housing Company.  It had been established in 2016 following approval from Council as a Limited Company, wholly owned by the Council, set up under the trading powers in the LGA 2013. WV Living focused on developing properties within the City to meet the Council’s aspirations in terms of affordable housing, particularly on sites which the market would not otherwise meet.   The accounts were audited each year as part of the Council’s due diligence.   The accounts were looked at by the Council’s auditors in addition to the auditors at WV Living.

The Chief Operating Officer remarked that it was good practice to have a clear Shareholder Agreement setting out the terms between the Council and the Linked Body defining the arrangement.   This had been setup in January 2017, it set out the parameters of what WV Living could decide and what was prohibited without Council approval. It was good practice to have a business case and regularly refreshed business plans.   The Council also had governance arrangements to monitor the compliance with the Shareholder Agreement, business case and business plan. There was a Shareholder Board which was made up of a cross party selection of Councillors to comprehensively check and challenge these arrangements.

The Chief Operating Officer said that in 2020/2021 there was a detailed review of the governance of WV Living by the Chief Operating Officer. The review resulted in several changes including the appointment of a Non-Executive Director of the relevant sector, a new business plan, strengthening of the Shareholder Board and transparency and appropriate separation between the Council and the company.

The Chief Operating Officer commented that the WV Living Board was made up of four Directors and a Company Secretary.  Directors were appointed through Individual Executive Decision Notice’s made by Cabinet Members for City Housing and City Assets and Resources, in conjunction with the Director of Finance. Through Delegated Authority those appointed had the power to run the business and ensure it was operating properly within the clear parameters set by the Council. A Board of Directors was made up of Council and Wolverhampton Homes Senior Officers. Council’s “key” controls were its ability to appoint and remove directors, amend the articles and exercise controls over shares and dividends and ultimately to wind the company up if it was not operating properly. The WV Living Board did not set remuneration policy, this needed to be approved by Council.

The Chief Operating Officer remarked that when a review took place back in 2021 there was a new business plan produced setting out clearly what the business would focus on, and it would be renewed each year. The Business Plan was approved by Cabinet in April 2022, it made clear that work would not be carried out beyond the City boundaries. If that were to change it would need to go through the business plan and the Shareholder Board. Critically borrowing from the Council to WV Living had significantly reduced to less than £3 million. WV Living assets which the Council owned significantly exceeded the Council’s lending. 

In the worst case scenario the tax payer would not lose out and would receive their money back. When looking at the Shareholder Board the Robin Hood Energy set out that the failures were down to poor sharing of quality information on a regular basis both with the Shareholder Board and with lead Councillors. Key Performance Indicators were now central, all asks of the Council were directed to lead Councillors.  There was an improved use of the Shareholder Board, such as quarterly meetings and an annual governance review on WV Living by the Monitoring Officer, as part of the Annual Governance Statement.   It was important to be transparent about the risks and manage those risks.

The Chief Operating Officer stated that the role of the Shareholder Board was to provide oversight on the operation of WV Living. There focus was on review and compliance with the Annual Business Plan and other key principles.   There was a Governance and Finance update for each Shareholder Board Meeting. WV Living needed the space to operate commercially within the business plan, along with clear measures and controls in place to understand how it was working and quarterly meetings.  Officers from WV Living attend the Shareholder Board meetings and are challenged and questioned. Advice was given by Governance and Finance departments.

The Chief Operating Officer commented that Clear Blue Water was a term under the LGA 2003. Under Local Government legislation the Council could not subsidise the running of trading companies.  Additional checks through internal audits were being carried out to provide assurance on the matter. Audits were there to provide early warning and assurance that things were working well. There should be a clear approach on conflicts and separate legal representation for WV Living when dealing with the Council. When looking at land transactions, all sales to WV Living by the Council must be at best consideration under s123 of the LGA 1972. This required testing through a market sale or though the report of a qualified independent chartered surveyor providing clear evidence that this was the right level. 

A report on all land sales was to come to the relevant Scrutiny Panel in Autumn. The subsidy provisions in relation to national legislation that provided the extent to which Local Authorities could subsidise business was tightly controlled to ensure public money was being used effectively. Clear blue water provided for transparency, ensuring that external audit reports were available publicly.

The Chief Operating Officer concluded that Linked Bodies were likely to continue to operate to assist Local Authorities with budgetary challenges and to find innovative ways of working. City of Wolverhampton Council had robust measures in place to check and challenge how the linked bodies operated. Those measures would continue to be reviewed.  A full review every three years of all linked bodies including WV Living would occur and be reported on to Councillors, including relevant Scrutiny Members. The City of Wolverhampton Council has good governance in place for its linked bodies. The Chief Operating Officer confirmed the importance of learning from other Local Authorities, this could mean that the Council’s monitoring arrangements or approach could change. 

The Chair acknowledged that there was a lot stated that the key thing was transparency and lesson learning from other Local Authorities so the Council did not end up in the same situation as Nottingham or Croydon.

A Panel Member thanked the Officer for the presentation, they had been particularly interested in hearing about the governance structure. With reference to the scrutiny of land transactions, they asked how those transfers were scrutinised before they took place. The Chief Operating Officer responded that the financial viability of WV Living was based on its assets and the assets it had were based on the transfers from the Council. In one sense we had gone from land that has not been developed by the Council to potentially land that was being developed by WV Living or land banked, if it was not being developed.

A Panel Member in reference to Key Performance Indicators asked if the Council transferred land with any clauses, penalties, or conditions.   Citing as an example a piece of land must have a planning application submitted within 2 years etc. This was normal business practice. The Deputy Chief Executive had a large role at the Council in overseeing City Assets as well as being a Director on WV Living. They asked if the Deputy Chief Executive could say WV Living was not working from a Council perspective and would he be able to do so given his management of City Assets.

The Chief Operating Officer confirmed that there was prior approval, any significant land transaction had to go through Cabinet or Cabinet Resources Panel for approval and this information was publicly available. There could be a commercial confidential aspect, when reporting so some reports were exempt from the public, but this information was often made available later or after the decision had been made.

The Chief Operating Officer stated that WV Living would have to look at what other options there were in relation to assets and whether it needed to purchase land not just from the Council but from other bodies.  WV Living was still required by the Council in the view of Senior Officers.   There were clear provisions in the agreement in the contracts, such as when the Council would expect the sale to have taken place by a certain date or conditional agreements. The key point was not to subsidise and to undertake business on a commercial basis. The Deputy Chief Executive was very clear on making sure that any conflicts were avoided, any decisions relating to assets he was scrupulous in making sure there was clear blue water. Disposals were managed entirely separate from him.

A Panel Member asked how many of the Directors were Officers within the Council.

The Chief Operating Officer stated there were two, the Chief Accountant and the Deputy Chief Executive. The other members were from Wolverhampton Homes and one who had no connection to the Council but had significant expertise working for registered social landlords.